##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: March 31, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 Commission File Number: 001-34466
 
 EDUCATION MANAGEMENT CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Pennsylvania
    
    25-1119571(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 210 Sixth Avenue, Pittsburgh, PA, 33rd Floor
    
    15222(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (412) 562-0900
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes
o No
þ




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##### 



Table of Contents
 INDEX
 PAGEPART I  FINANCIAL INFORMATIONITEM 1 FINANCIAL STATEMENTS
    
    
    2ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    25ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    37ITEM 4 CONTROLS AND PROCEDURES
    
    
    38PART II  OTHER INFORMATIONITEM 1 LEGAL PROCEEDINGS
    
    
    39ITEM 1A RISK FACTORS
    
    
    39ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    41ITEM 3 DEFAULTS UPON SENIOR SECURITIES
    
    
    41ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    41ITEM 5 OTHER INFORMATION
    
    
    41ITEM 6 EXHIBITS INDEX
    
    
    41SIGNATURES
    
    
    42Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 March 31,2010
    
    
    June 30,2009
    
    
    March 31,2009(Unaudited)
    
    
    
    
    
    
    (Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    472,637
    
    
    $
    363,318
    
    
    $
    525,710Restricted cash
    
    
    26,482
    
    
    
    10,372
    
    
    
    36,177Total cash, cash equivalents and restricted cash
    
    
    499,119
    
    
    
    373,690
    
    
    
    561,887Receivables, net of allowances of $118,246, $83,691
and $79,069
    
    
    94,776
    
    
    
    122,272
    
    
    
    57,131Notes, advances and other
    
    
    17,457
    
    
    
    13,678
    
    
    
    21,632Inventories
    
    
    13,242
    
    
    
    9,355
    
    
    
    10,635Deferred income taxes
    
    
    46,320
    
    
    
    45,164
    
    
    
    27,047Other current assets
    
    
    44,442
    
    
    
    30,163
    
    
    
    28,360Total current assets
    
    
    715,356
    
    
    
    594,322
    
    
    
    706,692Property and equipment, net
    
    
    634,587
    
    
    
    580,965
    
    
    
    532,835Other long-term assets
    
    
    82,168
    
    
    
    58,945
    
    
    
    57,636Intangible assets, net
    
    
    468,224
    
    
    
    471,882
    
    
    
    473,913Goodwill
    
    
    2,579,131
    
    
    
    2,579,131
    
    
    
    2,579,131Total assets
    
    $
    4,479,466
    
    
    $
    4,285,245
    
    
    $
    4,350,207Liabilities and shareholders equityCurrent liabilities:Current portion of long-term debt
    
    $
    12,172
    
    
    $
    12,622
    
    
    $
    12,705Revolving credit facility
    
    
    
    
    
    
    100,000
    
    
    
    180,000Accounts payable
    
    
    48,150
    
    
    
    53,516
    
    
    
    35,192Accrued liabilities
    
    
    187,812
    
    
    
    163,485
    
    
    
    158,638Accrued income taxes
    
    
    31,704
    
    
    
    5,015
    
    
    
    16,061Unearned tuition
    
    
    89,540
    
    
    
    118,741
    
    
    
    59,192Advance payments
    
    
    158,788
    
    
    
    67,020
    
    
    
    176,335Total current liabilities
    
    
    528,166
    
    
    
    520,399
    
    
    
    638,123Long-term debt, less current portion
    
    
    1,529,661
    
    
    
    1,876,021
    
    
    
    1,879,025Deferred income taxes
    
    
    178,388
    
    
    
    187,583
    
    
    
    165,128Deferred rent
    
    
    154,240
    
    
    
    123,656
    
    
    
    105,871Other long-term liabilities
    
    
    66,624
    
    
    
    91,933
    
    
    
    109,555Shareholders equity:Common Stock, par value $0.01 per share; 600,000,000
shares authorized; 142,848,312 issued and outstanding
at March 31, 2010 and 119,770,277 issued and
outstanding at June 30, 2009 and March 31, 2009
    
    
    1,428
    
    
    
    1,198
    
    
    
    1,198Additional paid-in capital
    
    
    1,745,512
    
    
    
    1,338,316
    
    
    
    1,338,316Retained earnings
    
    
    302,373
    
    
    
    181,767
    
    
    
    160,488Accumulated other comprehensive loss
    
    
    (26,926
    )
    
    
    (35,628
    )
    
    
    (47,497
    )Total shareholders equity
    
    
    2,022,387
    
    
    
    1,485,653
    
    
    
    1,452,505Total liabilities and shareholders equity
    
    $
    4,479,466
    
    
    $
    4,285,245
    
    
    $
    4,350,207
   2




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited)

(In thousands except per share amounts)
 For the Three Months
    
    
    For the Nine MonthsEnded March 31,
    
    
    Ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    $
    667,896
    
    
    $
    535,438
    
    
    $
    1,857,764
    
    
    $
    1,491,884Costs and expenses:Educational services
    
    
    323,146
    
    
    
    268,499
    
    
    
    934,125
    
    
    
    787,629General and administrative
    
    
    174,446
    
    
    
    129,272
    
    
    
    491,608
    
    
    
    369,995Management fees paid to affiliates
    
    
    
    
    
    
    1,250
    
    
    
    32,055
    
    
    
    3,750Depreciation and amortization
    
    
    30,674
    
    
    
    28,828
    
    
    
    88,902
    
    
    
    83,007Total costs and expenses
    
    
    528,266
    
    
    
    427,849
    
    
    
    1,546,690
    
    
    
    1,244,381Income before interest, loss on early
retirement of debt and income taxes
    
    
    139,630
    
    
    
    107,589
    
    
    
    311,074
    
    
    
    247,503Interest expense, net
    
    
    27,933
    
    
    
    37,400
    
    
    
    94,652
    
    
    
    116,014Loss on early retirement of debt
    
    
    2,445
    
    
    
    
    
    
    
    47,207
    
    
    
    Income before income taxes
    
    
    109,252
    
    
    
    70,189
    
    
    
    169,215
    
    
    
    131,489Provision for income taxes
    
    
    24,682
    
    
    
    26,062
    
    
    
    48,609
    
    
    
    48,363Net income
    
    $
    84,570
    
    
    $
    44,127
    
    
    $
    120,606
    
    
    $
    83,126Earnings per share:Basic
    
    $
    0.59
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.69Diluted
    
    $
    0.59
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.69Weighted average number of shares outstanding:Basic
    
    
    142,831
    
    
    
    119,770
    
    
    
    134,939
    
    
    
    119,769Diluted
    
    
    143,936
    
    
    
    119,770
    
    
    
    135,675
    
    
    
    119,769
   3




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)
 For the Nine MonthsEnded March 31,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    120,606
    
    
    $
    83,126Adjustments to reconcile net income to
net cash flows provided by operating activities:Depreciation and amortization of property and equipment
    
    
    82,231
    
    
    
    69,875Bad debt expense
    
    
    78,574
    
    
    
    52,845Amortization of intangible assets
    
    
    6,671
    
    
    
    13,132Amortization of debt issuance costs
    
    
    6,127
    
    
    
    5,768Loss on early retirement of debt
    
    
    47,207
    
    
    
    Share-based compensation
    
    
    19,428
    
    
    
    Non cash adjustments related to deferred rent
    
    
    1,898
    
    
    
    (2,045
    )Purchase of private loans
    
    
    (51,501
    )
    
    
    (3,235
    )Reimbursements for tenant improvements
    
    
    8,229
    
    
    
    19,191Changes in assets and liabilities:Restricted cash
    
    
    (16,110
    )
    
    
    (22,355
    )Receivables
    
    
    (39,520
    )
    
    
    (19,057
    )Inventories
    
    
    (3,868
    )
    
    
    (2,202
    )Other assets
    
    
    (18,325
    )
    
    
    (21,246
    )Accounts payable
    
    
    696
    
    
    
    (13,369
    )Accrued liabilities
    
    
    35,675
    
    
    
    48,795Unearned tuition
    
    
    (29,202
    )
    
    
    (9,962
    )Advance payments
    
    
    91,341
    
    
    
    115,656Total adjustments
    
    
    219,551
    
    
    
    231,791Net cash flows provided by operating activities
    
    
    340,157
    
    
    
    314,917Cash flows from investing activities:Expenditures for long-lived assets
    
    
    (119,825
    )
    
    
    (97,985
    )Reimbursements for tenant improvements
    
    
    (8,229
    )
    
    
    (19,191
    )Net cash flows used in investing activities
    
    
    (128,054
    )
    
    
    (117,176
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    
    
    
    
    180,000Payments under revolving credit facility
    
    
    (100,000
    )
    
    
    (120,000
    )Retirement of senior subordinated notes
    
    
    (378,952
    )
    
    
    Net proceeds from issuance of common stock, including stock option exercises
    
    
    387,998
    
    
    
    Principal payments on long-term debt
    
    
    (9,489
    )
    
    
    (9,715
    )Debt issuance costs
    
    
    (2,400
    )
    
    
    (887
    )Net cash flows (used in) provided by financing activities
    
    
    (102,843
    )
    
    
    49,398Effect of exchange rate changes on cash and cash equivalents
    
    
    59
    
    
    
    1,163Net change in cash and cash equivalents
    
    
    109,319
    
    
    
    248,302Cash and cash equivalents, beginning of period
    
    
    363,318
    
    
    
    277,408Cash and cash equivalents, end of period
    
    $
    472,637
    
    
    $
    525,710Cash paid during the period for:Interest (including swap settlement)
    
    $
    81,734
    
    
    $
    92,914Income taxes
    
    
    53,868
    
    
    
    47,421
   4




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
 AccumulatedCommon
    
    
    Additional
    
    
    
    
    
    
    OtherStock at
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensivePar Value
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance, June 30, 2008
    
    $
    1,198
    
    
    $
    1,338,302
    
    
    $
    77,362
    
    
    $
    (24,685
    )
    
    $
    1,392,177Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    104,405
    
    
    
    
    
    
    
    104,405Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,147
    )
    
    
    (1,147
    )Unrealized loss on interest
rate swaps, net of tax
benefit of $5,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,796
    )
    
    
    (9,796
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,462
    (a)Other
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Balance, June 30, 2009
    
    
    1,198
    
    
    
    1,338,316
    
    
    
    181,767
    
    
    
    (35,628
    )(b)
    
    
    1,485,653(Unaudited)Issuance of common stock
including stock option exercises
    
    
    230
    
    
    
    387,768
    
    
    
    
    
    
    
    
    
    
    
    387,998Share-based compensation
    
    
    
    
    
    
    19,428
    
    
    
    
    
    
    
    
    
    
    
    19,428Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    120,606
    
    
    
    
    
    
    
    120,606Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,046
    
    
    
    1,046Unrealized gain on interest
rate swaps, net of tax
expense of $4,447
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,656
    
    
    
    7,656Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,308Balance, March 31, 2010
    
    $
    1,428
    
    
    $
    1,745,512
    
    
    $
    302,373
    
    
    $
    (26,926
    )(b)
    
    $
    2,022,387
 (a)
    
    During the nine months ended March 31, 2009, other comprehensive loss
consisted of a $22.2 million unrealized loss on interest rate swaps, net of tax
benefit, and a $0.6 million foreign currency translation loss.(b)
    
    The balance in accumulated other comprehensive loss at March 31, 2010,
June 30, 2009 and March 31, 2009 is comprised of $26.5 million, $34.2 million
and $46.6 million of unrealized losses on interest rate swaps, net of tax
benefit, respectively and $0.4 million, $1.4 million and $0.9 million of
cumulative foreign currency translation losses, respectively.   5




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
 Nature of operations
  Basis of presentation
    Ownership
   6




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
  Initial public offering
   Seasonality
  Reclassifications
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 TM
  7




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 3. EARNINGS PER SHARE
   For the Three Months
    
    
    For the Nine MonthsEnded March 31,
    
    
    Ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    84,570
    
    
    $
    44,127
    
    
    $
    120,606
    
    
    $
    83,126Weighted average number of shares
outstanding:Basic
    
    
    142,831
    
    
    
    119,770
    
    
    
    134,939
    
    
    
    119,769Effect of stock-based awards
    
    
    1,105
    
    
    
    
    
    
    
    736
    
    
    
    Diluted
    
    
    143,936
    
    
    
    119,770
    
    
    
    135,675
    
    
    
    119,769Earnings per share:Basic
    
    $
    0.59
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.69Diluted
    
    $
    0.59
    
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    0.69
  4. SHARE-BASED PAYMENT
    2006 Stock Option Plan
   8




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
   Omnibus Long-Term Incentive Plan
   Long Term Incentive Compensation Plan
   9




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 5. PROPERTY AND EQUIPMENT
 (in thousands):
 Asset Class
    
    March 31,2010
    
    
    June 30,2009
    
    
    March 31,2009Land
    
    $
    17,861
    
    
    $
    17,805
    
    
    $
    17,805Buildings and improvements
    
    
    73,917
    
    
    
    74,171
    
    
    
    73,901Leasehold improvements and capitalized lease costs
    
    
    404,383
    
    
    
    329,449
    
    
    
    315,893Furniture and equipment
    
    
    117,117
    
    
    
    97,783
    
    
    
    95,593Technology and other equipment
    
    
    205,144
    
    
    
    170,818
    
    
    
    160,803Software
    
    
    53,083
    
    
    
    45,651
    
    
    
    40,702Library books
    
    
    33,551
    
    
    
    29,778
    
    
    
    28,566Construction in progress
    
    
    44,553
    
    
    
    43,470
    
    
    
    23,029Total
    
    
    949,609
    
    
    
    808,925
    
    
    
    756,292Less accumulated depreciation
    
    
    (315,022
    )
    
    
    (227,960
    )
    
    
    (223,457
    )Property and equipment, net
    
    $
    634,587
    
    
    $
    580,965
    
    
    $
    532,835
  6. GOODWILL AND INTANGIBLE ASSETS
 Goodwill
    10




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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Intangible Assets
 in thousands)
 March 31, 2010
    
    
    June 30, 2009
    
    
    March 31, 2009Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationTradename-Art Institute
    
    $
    330,000
    
    
    $
    
    
    
    $
    330,000
    
    
    $
    
    
    
    $
    330,000
    
    
    $
    Tradename-Argosy University
    
    
    3,000
    
    
    
    (1,278
    )
    
    
    3,000
    
    
    
    (1,028
    )
    
    
    3,000
    
    
    
    (944
    )Licensing, accreditation and Title
IV program participation
    
    
    112,179
    
    
    
    
    
    
    
    112,179
    
    
    
    
    
    
    
    112,179
    
    
    
    Curriculum and programs
    
    
    30,935
    
    
    
    (17,191
    )
    
    
    27,974
    
    
    
    (13,520
    )
    
    
    26,446
    
    
    
    (12,457
    )Student contracts, applications and
relationships
    
    
    39,511
    
    
    
    (33,687
    )
    
    
    39,511
    
    
    
    (32,479
    )
    
    
    39,511
    
    
    
    (30,723
    )Favorable leases and other
    
    
    16,425
    
    
    
    (11,670
    )
    
    
    16,351
    
    
    
    (10,106
    )
    
    
    16,318
    
    
    
    (9,417
    )Total intangible assets
    
    $
    532,050
    
    
    $
    (63,826
    )
    
    $
    529,015
    
    
    $
    (57,133
    )
    
    $
    527,454
    
    
    $
    (53,541
    )
     AmortizationFiscal years
    
    Expense2010 (remainder)
    
    $
    1,9372011
    
    
    8,0442012
    
    
    6,9782013
    
    
    4,6312014
    
    
    2,862Thereafter
    
    
    1,593
  11




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 7. ACCRUED LIABILITIES
 (in thousands)
 March 31,2010
    
    
    June 30,2009
    
    
    March 31,2009Payroll and related taxes
    
    $
    67,775
    
    
    $
    77,894
    
    
    $
    51,791Capital expenditures
    
    
    11,187
    
    
    
    8,032
    
    
    
    7,403Advertising
    
    
    30,009
    
    
    
    25,192
    
    
    
    32,452Interest
    
    
    21,790
    
    
    
    13,878
    
    
    
    31,448Benefits
    
    
    9,569
    
    
    
    8,597
    
    
    
    10,023Other
    
    
    47,482
    
    
    
    29,892
    
    
    
    25,521Total accrued liabilities
    
    $
    187,812
    
    
    $
    163,485
    
    
    $
    158,638
  8. SHORT-TERM AND LONG-TERM DEBT
  Short-Term Debt:
    12




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 Long-Term Debt:
 in thousands)
 March 31,2010
    
    
    June 30,2009
    
    
    March 31,2009Senior secured term loan facility, due 2013
    
    $
    1,117,940
    
    
    $
    1,126,827
    
    
    $
    1,129,790Senior notes due 2014 at 8.75%
    
    
    375,000
    
    
    
    375,000
    
    
    
    375,000Senior subordinated notes due 2016 at 10.25%
    
    
    47,680
    
    
    
    385,000
    
    
    
    385,000Other
    
    
    1,213
    
    
    
    1,816
    
    
    
    1,940Total long-term debt
    
    
    1,541,833
    
    
    
    1,888,643
    
    
    
    1,891,730Less current portion
    
    
    12,172
    
    
    
    12,622
    
    
    
    12,705Total long term debt, less current portion
    
    $
    1,529,661
    
    
    $
    1,876,021
    
    
    $
    1,879,025
   9. DERIVATIVE INSTRUMENTS
      13




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
 in
thousands)
 March 31, 2010
    
    
    June 30, 2009
    
    
    March 31, 2009Carrying
    
    
    
    
    
    
    Carrying
    
    
    
    
    
    
    CarryingValue
    
    
    Fair Value
    
    
    Value
    
    
    Fair Value
    
    
    Value
    
    
    Fair ValueInterest rate swap liabilities
    
    $
    42,319
    
    
    $
    42,319
    
    
    $
    54,421
    
    
    $
    54,421
    
    
    $
    74,057
    
    
    $
    74,057Variable rate debt
    
    
    1,117,940
    
    
    
    1,089,992
    
    
    
    1,126,827
    
    
    
    1,031,047
    
    
    
    1,129,790
    
    
    
    949,024Fixed rate debt
    
    
    423,893
    
    
    
    437,082
    
    
    
    761,816
    
    
    
    738,916
    
    
    
    761,940
    
    
    
    720,040
  11. INCOME TAXES
     14




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 12. CONTINGENCIES
 Capalbo et al. v. Argosy University, Education Management LLC, Education Management
Corporation and Marilyn Powell-Kissinger Capalbo
 Capalbo Adibian et al. v. Argosy
University, Education Management LLC and Education Management
Corporation Adibian Capalbo
  qui tam Buchanan v. South University Online and Education
Management Corporation
  15




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
    13. RELATED PARTY TRANSACTIONS
      16




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 14. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
   CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2010 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    402,671
    
    
    $
    4,685
    
    
    $
    18,867
    
    
    $
    
    
    
    $
    426,223
    
    
    $
    46,414
    
    
    $
    
    
    
    $
    472,637Restricted cash
    
    
    737
    
    
    
    500
    
    
    
    25,245
    
    
    
    
    
    
    
    26,482
    
    
    
    
    
    
    
    
    
    
    
    26,482Notes, advances and trade receivables, net
    
    
    14,900
    
    
    
    96
    
    
    
    97,235
    
    
    
    
    
    
    
    112,231
    
    
    
    2
    
    
    
    
    
    
    
    112,233Inventories
    
    
    
    
    
    
    168
    
    
    
    13,074
    
    
    
    
    
    
    
    13,242
    
    
    
    
    
    
    
    
    
    
    
    13,242Other current assets
    
    
    28,492
    
    
    
    615
    
    
    
    61,655
    
    
    
    
    
    
    
    90,762
    
    
    
    
    
    
    
    
    
    
    
    90,762Total current assets
    
    
    446,800
    
    
    
    6,064
    
    
    
    216,076
    
    
    
    
    
    
    
    668,940
    
    
    
    46,416
    
    
    
    
    
    
    
    715,356Property and equipment, net
    
    
    55,787
    
    
    
    6,610
    
    
    
    572,190
    
    
    
    
    
    
    
    634,587
    
    
    
    
    
    
    
    
    
    
    
    634,587Intangible assets, net
    
    
    2,829
    
    
    
    67
    
    
    
    465,328
    
    
    
    
    
    
    
    468,224
    
    
    
    
    
    
    
    
    
    
    
    468,224Goodwill
    
    
    7,328
    
    
    
    
    
    
    
    2,571,803
    
    
    
    
    
    
    
    2,579,131
    
    
    
    
    
    
    
    
    
    
    
    2,579,131Intercompany balances
    
    
    937,892
    
    
    
    (62,315
    )
    
    
    (1,277,814
    )
    
    
    
    
    
    
    (402,237
    )
    
    
    402,237
    
    
    
    
    
    
    
    Other long-term assets
    
    
    41,276
    
    
    
    35,295
    
    
    
    5,598
    
    
    
    
    
    
    
    82,169
    
    
    
    (1
    )
    
    
    
    
    
    
    82,168Investment in subsidiaries
    
    
    1,835,815
    
    
    
    
    
    
    
    
    
    
    
    (1,835,815
    )
    
    
    
    
    
    
    1,573,920
    
    
    
    (1,573,920
    )
    
    
    Total assets
    
    $
    3,327,727
    
    
    $
    (14,279
    )
    
    $
    2,553,181
    
    
    $
    (1,835,815
    )
    
    $
    4,030,814
    
    
    $
    2,022,572
    
    
    $
    (1,573,920
    )
    
    $
    4,479,466Liabilities and shareholders equity (deficit)Current:Current portion of long-term debt
    
    $
    11,850
    
    
    $
    
    
    
    $
    322
    
    
    $
    
    
    
    $
    12,172
    
    
    $
    
    
    
    $
    
    
    
    $
    12,172Accounts payable, accrued and other current
liabilities
    
    
    162,718
    
    
    
    3,934
    
    
    
    349,157
    
    
    
    
    
    
    
    515,809
    
    
    
    185
    
    
    
    
    
    
    
    515,994Total current liabilities
    
    
    174,568
    
    
    
    3,934
    
    
    
    349,479
    
    
    
    
    
    
    
    527,981
    
    
    
    185
    
    
    
    
    
    
    
    528,166Long-term debt, less current portion
    
    
    1,528,770
    
    
    
    
    
    
    
    891
    
    
    
    
    
    
    
    1,529,661
    
    
    
    
    
    
    
    
    
    
    
    1,529,661Other long-term liabilities
    
    
    66,066
    
    
    
    7,395
    
    
    
    147,403
    
    
    
    
    
    
    
    220,864
    
    
    
    
    
    
    
    
    
    
    
    220,864Deferred income taxes
    
    
    (15,597
    )
    
    
    (12,206
    )
    
    
    206,191
    
    
    
    
    
    
    
    178,388
    
    
    
    
    
    
    
    
    
    
    
    178,388Total liabilities
    
    
    1,753,807
    
    
    
    (877
    )
    
    
    703,964
    
    
    
    
    
    
    
    2,456,894
    
    
    
    185
    
    
    
    
    
    
    
    2,457,079Total shareholders equity (deficit)
    
    
    1,573,920
    
    
    
    (13,402
    )
    
    
    1,849,217
    
    
    
    (1,835,815
    )
    
    
    1,573,920
    
    
    
    2,022,387
    
    
    
    (1,573,920
    )
    
    
    2,022,387Total liabilities and shareholders
equity (deficit)
    
    $
    3,327,727
    
    
    $
    (14,279
    )
    
    $
    2,553,181
    
    
    $
    (1,835,815
    )
    
    $
    4,030,814
    
    
    $
    2,022,572
    
    
    $
    (1,573,920
    )
    
    $
    4,479,466
  17




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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    15,789
    
    
    $
    481
    
    
    $
    305,287
    
    
    $
    
    
    
    $
    321,557
    
    
    $
    41,761
    
    
    $
    
    
    
    $
    363,318Restricted cash
    
    
    789
    
    
    
    
    
    
    
    9,583
    
    
    
    
    
    
    
    10,372
    
    
    
    
    
    
    
    
    
    
    
    10,372Notes, advances and trade receivables, net
    
    
    172
    
    
    
    35
    
    
    
    135,738
    
    
    
    
    
    
    
    135,945
    
    
    
    5
    
    
    
    
    
    
    
    135,950Inventories
    
    
    
    
    
    
    
    
    
    
    9,355
    
    
    
    
    
    
    
    9,355
    
    
    
    
    
    
    
    
    
    
    
    9,355Other current assets
    
    
    19,056
    
    
    
    1,213
    
    
    
    55,058
    
    
    
    
    
    
    
    75,327
    
    
    
    
    
    
    
    
    
    
    
    75,327Total current assets
    
    
    35,806
    
    
    
    1,729
    
    
    
    515,021
    
    
    
    
    
    
    
    552,556
    
    
    
    41,766
    
    
    
    
    
    
    
    594,322Property and equipment, net
    
    
    52,190
    
    
    
    6,137
    
    
    
    522,638
    
    
    
    
    
    
    
    580,965
    
    
    
    
    
    
    
    
    
    
    
    580,965Intangible assets, net
    
    
    3,119
    
    
    
    61
    
    
    
    468,702
    
    
    
    
    
    
    
    471,882
    
    
    
    
    
    
    
    
    
    
    
    471,882Goodwill
    
    
    7,328
    
    
    
    
    
    
    
    2,571,803
    
    
    
    
    
    
    
    2,579,131
    
    
    
    
    
    
    
    
    
    
    
    2,579,131Intercompany balances
    
    
    1,880,889
    
    
    
    (20,819
    )
    
    
    (1,859,626
    )
    
    
    
    
    
    
    444
    
    
    
    (444
    )
    
    
    
    
    
    
    Other long-term assets
    
    
    48,447
    
    
    
    9,764
    
    
    
    734
    
    
    
    
    
    
    
    58,945
    
    
    
    
    
    
    
    
    
    
    
    58,945Investment in subsidiaries
    
    
    1,590,364
    
    
    
    
    
    
    
    
    
    
    
    (1,590,364
    )
    
    
    
    
    
    
    1,444,515
    
    
    
    (1,444,515
    )
    
    
    Total assets
    
    $
    3,618,143
    
    
    $
    (3,128
    )
    
    $
    2,219,272
    
    
    $
    (1,590,364
    )
    
    $
    4,243,923
    
    
    $
    1,485,837
    
    
    $
    (1,444,515
    )
    
    $
    4,285,245Liabilities and shareholders equity (deficit)Current:Current portion of long-term debt
    
    $
    111,911
    
    
    $
    
    
    
    $
    711
    
    
    $
    
    
    
    $
    112,622
    
    
    $
    
    
    
    $
    
    
    
    $
    112,622Accounts payable, accrued and other current
liabilities
    
    
    111,694
    
    
    
    4,739
    
    
    
    291,159
    
    
    
    
    
    
    
    407,592
    
    
    
    185
    
    
    
    
    
    
    
    407,777Total current liabilities
    
    
    223,605
    
    
    
    4,739
    
    
    
    291,870
    
    
    
    
    
    
    
    520,214
    
    
    
    185
    
    
    
    
    
    
    
    520,399Long-term debt, less current portion
    
    
    1,874,921
    
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,876,021
    
    
    
    
    
    
    
    
    
    
    
    1,876,021Other long-term liabilities
    
    
    91,124
    
    
    
    4,649
    
    
    
    119,817
    
    
    
    
    
    
    
    215,590
    
    
    
    (1
    )
    
    
    
    
    
    
    215,589Deferred income taxes
    
    
    (16,022
    )
    
    
    72
    
    
    
    203,533
    
    
    
    
    
    
    
    187,583
    
    
    
    
    
    
    
    
    
    
    
    187,583Total liabilities
    
    
    2,173,628
    
    
    
    9,460
    
    
    
    616,320
    
    
    
    
    
    
    
    2,799,408
    
    
    
    184
    
    
    
    
    
    
    
    2,799,592Total shareholders equity (deficit)
    
    
    1,444,515
    
    
    
    (12,588
    )
    
    
    1,602,952
    
    
    
    (1,590,364
    )
    
    
    1,444,515
    
    
    
    1,485,653
    
    
    
    (1,444,515
    )
    
    
    1,485,653Total liabilities and shareholders
equity (deficit)
    
    $
    3,618,143
    
    
    $
    (3,128
    )
    
    $
    2,219,272
    
    
    $
    (1,590,364
    )
    
    $
    4,243,923
    
    
    $
    1,485,837
    
    
    $
    (1,444,515
    )
    
    $
    4,285,245
  18




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    475,979
    
    
    $
    614
    
    
    $
    7,394
    
    
    $
    
    
    
    $
    483,987
    
    
    $
    41,723
    
    
    $
    
    
    
    $
    525,710Restricted cash
    
    
    311
    
    
    
    
    
    
    
    35,866
    
    
    
    
    
    
    
    36,177
    
    
    
    
    
    
    
    
    
    
    
    36,177Notes, advances and trade receivables, net
    
    
    (402
    )
    
    
    47
    
    
    
    79,103
    
    
    
    
    
    
    
    78,748
    
    
    
    15
    
    
    
    
    
    
    
    78,763Inventories
    
    
    
    
    
    
    
    
    
    
    10,635
    
    
    
    
    
    
    
    10,635
    
    
    
    
    
    
    
    
    
    
    
    10,635Other current assets
    
    
    16,533
    
    
    
    686
    
    
    
    38,188
    
    
    
    
    
    
    
    55,407
    
    
    
    
    
    
    
    
    
    
    
    55,407Total current assets
    
    
    492,421
    
    
    
    1,347
    
    
    
    171,186
    
    
    
    
    
    
    
    664,954
    
    
    
    41,738
    
    
    
    
    
    
    
    706,692Property and equipment, net
    
    
    48,472
    
    
    
    6,137
    
    
    
    478,226
    
    
    
    
    
    
    
    532,835
    
    
    
    
    
    
    
    
    
    
    
    532,835Intangible assets, net
    
    
    399
    
    
    
    61
    
    
    
    473,453
    
    
    
    
    
    
    
    473,913
    
    
    
    
    
    
    
    
    
    
    
    473,913Goodwill
    
    
    7,328
    
    
    
    
    
    
    
    2,571,803
    
    
    
    
    
    
    
    2,579,131
    
    
    
    
    
    
    
    
    
    
    
    2,579,131Intercompany balances
    
    
    1,551,643
    
    
    
    (13,211
    )
    
    
    (1,537,932
    )
    
    
    
    
    
    
    500
    
    
    
    (500
    )
    
    
    
    
    
    
    Other long-term assets
    
    
    50,645
    
    
    
    1,764
    
    
    
    5,227
    
    
    
    
    
    
    
    57,636
    
    
    
    
    
    
    
    
    
    
    
    57,636Investment in subsidiaries
    
    
    1,547,113
    
    
    
    
    
    
    
    
    
    
    
    (1,547,113
    )
    
    
    
    
    
    
    1,411,452
    
    
    
    (1,411,452
    )
    
    
    Total assets
    
    $
    3,698,021
    
    
    $
    (3,902
    )
    
    $
    2,161,963
    
    
    $
    (1,547,113
    )
    
    $
    4,308,969
    
    
    $
    1,452,690
    
    
    $
    (1,411,452
    )
    
    $
    4,350,207Liabilities and shareholders equity (deficit)Current:Short-term and current portion of long-term debt
    
    $
    191,913
    
    
    $
    
    
    
    $
    792
    
    
    $
    
    
    
    $
    192,705
    
    
    $
    
    
    
    $
    
    
    
    $
    192,705Accounts payable, accrued and other current liabilities
    
    
    126,473
    
    
    
    4,739
    
    
    
    314,021
    
    
    
    
    
    
    
    445,233
    
    
    
    185
    
    
    
    
    
    
    
    445,418Total current liabilities
    
    
    318,386
    
    
    
    4,739
    
    
    
    314,813
    
    
    
    
    
    
    
    637,938
    
    
    
    185
    
    
    
    
    
    
    
    638,123Long-term debt, less current portion
    
    
    1,877,888
    
    
    
    
    
    
    
    1,137
    
    
    
    
    
    
    
    1,879,025
    
    
    
    
    
    
    
    
    
    
    
    1,879,025Other long-term liabilities
    
    
    110,334
    
    
    
    3,305
    
    
    
    101,787
    
    
    
    
    
    
    
    215,426
    
    
    
    
    
    
    
    
    
    
    
    215,426Deferred income taxes
    
    
    (20,039
    )
    
    
    72
    
    
    
    185,095
    
    
    
    
    
    
    
    165,128
    
    
    
    
    
    
    
    
    
    
    
    165,128Total liabilities
    
    
    2,286,569
    
    
    
    8,116
    
    
    
    602,832
    
    
    
    
    
    
    
    2,897,517
    
    
    
    185
    
    
    
    
    
    
    
    2,897,702Total shareholders equity (deficit)
    
    
    1,411,452
    
    
    
    (12,018
    )
    
    
    1,559,131
    
    
    
    (1,547,113
    )
    
    
    1,411,452
    
    
    
    1,452,505
    
    
    
    (1,411,452
    )
    
    
    1,452,505Total liabilities and shareholders equity (deficit)
    
    $
    3,698,021
    
    
    $
    (3,902
    )
    
    $
    2,161,963
    
    
    $
    (1,547,113
    )
    
    $
    4,308,969
    
    
    $
    1,452,690
    
    
    $
    (1,411,452
    )
    
    $
    4,350,207
  19




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2010 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    (1,232
    )
    
    $
    669,128
    
    
    $
    
    
    
    $
    667,896
    
    
    $
    
    
    
    $
    
    
    
    $
    667,896Costs and expenses:Educational services
    
    
    17,068
    
    
    
    (738
    )
    
    
    306,816
    
    
    
    
    
    
    
    323,146
    
    
    
    
    
    
    
    
    
    
    
    323,146General and administrative
    
    
    (19,587
    )
    
    
    (94
    )
    
    
    194,070
    
    
    
    
    
    
    
    174,389
    
    
    
    57
    
    
    
    
    
    
    
    174,446Management fees paid to affiliates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    4,570
    
    
    
    59
    
    
    
    26,045
    
    
    
    
    
    
    
    30,674
    
    
    
    
    
    
    
    
    
    
    
    30,674Total costs and expenses
    
    
    2,051
    
    
    
    (773
    )
    
    
    526,931
    
    
    
    
    
    
    
    528,209
    
    
    
    57
    
    
    
    
    
    
    
    528,266Income (loss) before interest, loss on
early retirement of debt and income taxes
    
    
    (2,051
    )
    
    
    (459
    )
    
    
    142,197
    
    
    
    
    
    
    
    139,687
    
    
    
    (57
    )
    
    
    
    
    
    
    139,630Interest
(income) expense, net
    
    
    27,811
    
    
    
    (560
    )
    
    
    688
    
    
    
    
    
    
    
    27,939
    
    
    
    (6
    )
    
    
    
    
    
    
    27,933Loss on early retirement of debt
    
    
    2,445
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,445
    
    
    
    
    
    
    
    
    
    
    
    2,445Equity in earnings of subsidiaries
    
    
    (123,604
    )
    
    
    
    
    
    
    
    
    
    
    123,604
    
    
    
    
    
    
    
    (84,621
    )
    
    
    84,621
    
    
    
    Income (loss) before income taxes
    
    
    91,297
    
    
    
    101
    
    
    
    141,509
    
    
    
    (123,604
    )
    
    
    109,303
    
    
    
    84,570
    
    
    
    (84,621
    )
    
    
    109,252Provision for income taxes
    
    
    6,676
    
    
    
    168
    
    
    
    17,838
    
    
    
    
    
    
    
    24,682
    
    
    
    
    
    
    
    
    
    
    
    24,682Net income (loss)
    
    $
    84,621
    
    
    $
    (67
    )
    
    $
    123,671
    
    
    $
    (123,604
    )
    
    $
    84,621
    
    
    $
    84,570
    
    
    $
    (84,621
    )
    
    $
    84,570
 CONSOLIDATED STATEMENT OF OPERATIONS  For the Three Months Ended March 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    (613
    )
    
    $
    536,051
    
    
    $
    
    
    
    $
    535,438
    
    
    $
    
    
    
    $
    
    
    
    $
    535,438Costs and expenses:Educational services
    
    
    11,165
    
    
    
    (867
    )
    
    
    258,201
    
    
    
    
    
    
    
    268,499
    
    
    
    
    
    
    
    
    
    
    
    268,499General and administrative
    
    
    (18,281
    )
    
    
    903
    
    
    
    146,592
    
    
    
    
    
    
    
    129,214
    
    
    
    58
    
    
    
    
    
    
    
    129,272Management fees paid to affiliates
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    1,250Depreciation and amortization
    
    
    3,805
    
    
    
    43
    
    
    
    24,980
    
    
    
    
    
    
    
    28,828
    
    
    
    
    
    
    
    
    
    
    
    28,828Total costs and expenses
    
    
    (2,061
    )
    
    
    79
    
    
    
    429,773
    
    
    
    
    
    
    
    427,791
    
    
    
    58
    
    
    
    
    
    
    
    427,849Income (loss) before interest and income taxes
    
    
    2,061
    
    
    
    (692
    )
    
    
    106,278
    
    
    
    
    
    
    
    107,647
    
    
    
    (58
    )
    
    
    
    
    
    
    107,589Interest
(income) expense, net
    
    
    36,728
    
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    37,454
    
    
    
    (54
    )
    
    
    
    
    
    
    37,400Equity in earnings of subsidiaries
    
    
    (66,599
    )
    
    
    
    
    
    
    
    
    
    
    66,599
    
    
    
    
    
    
    
    (44,129
    )
    
    
    44,129
    
    
    
    Income (loss) before income taxes
    
    
    31,932
    
    
    
    (692
    )
    
    
    105,552
    
    
    
    (66,599
    )
    
    
    70,193
    
    
    
    44,125
    
    
    
    (44,129
    )
    
    
    70,189Provision for (benefit from) income taxes
    
    
    (12,197
    )
    
    
    (255
    )
    
    
    38,516
    
    
    
    
    
    
    
    26,064
    
    
    
    (2
    )
    
    
    
    
    
    
    26,062Net income (loss)
    
    $
    44,129
    
    
    $
    (437
    )
    
    $
    67,036
    
    
    $
    (66,599
    )
    
    $
    44,129
    
    
    $
    44,127
    
    
    $
    (44,129
    )
    
    $
    44,127
  20




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 2010 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    (4,691
    )
    
    $
    1,862,455
    
    
    $
    
    
    
    $
    1,857,764
    
    
    $
    
    
    
    $
    
    
    
    $
    1,857,764Costs and expenses:Educational services
    
    
    43,242
    
    
    
    (3,264
    )
    
    
    894,147
    
    
    
    
    
    
    
    934,125
    
    
    
    
    
    
    
    
    
    
    
    934,125General and administrative
    
    
    (54,293
    )
    
    
    297
    
    
    
    545,433
    
    
    
    
    
    
    
    491,437
    
    
    
    171
    
    
    
    
    
    
    
    491,608Management fees paid to affiliates
    
    
    32,055
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,055
    
    
    
    
    
    
    
    
    
    
    
    32,055Depreciation and amortization
    
    
    13,472
    
    
    
    186
    
    
    
    75,244
    
    
    
    
    
    
    
    88,902
    
    
    
    
    
    
    
    
    
    
    
    88,902Total costs and expenses
    
    
    34,476
    
    
    
    (2,781
    )
    
    
    1,514,824
    
    
    
    
    
    
    
    1,546,519
    
    
    
    171
    
    
    
    
    
    
    
    1,546,690Income (loss) before interest, loss on
early retirement of debt and income taxes
    
    
    (34,476
    )
    
    
    (1,910
    )
    
    
    347,631
    
    
    
    
    
    
    
    311,245
    
    
    
    (171
    )
    
    
    
    
    
    
    311,074Interest (income) expense, net
    
    
    93,334
    
    
    
    (768
    )
    
    
    2,130
    
    
    
    
    
    
    
    94,696
    
    
    
    (44
    )
    
    
    
    
    
    
    94,652Loss on early retirement of debt
    
    
    47,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,207
    
    
    
    
    
    
    
    
    
    
    
    47,207Equity in earnings of subsidiaries
    
    
    (245,451
    )
    
    
    
    
    
    
    
    
    
    
    245,451
    
    
    
    
    
    
    
    (120,703
    )
    
    
    120,703
    
    
    
    Income (loss) before income taxes
    
    
    70,434
    
    
    
    (1,142
    )
    
    
    345,501
    
    
    
    (245,451
    )
    
    
    169,342
    
    
    
    120,576
    
    
    
    (120,703
    )
    
    
    169,215Provision for (benefit from) income taxes
    
    
    (50,269
    )
    
    
    (328
    )
    
    
    99,236
    
    
    
    
    
    
    
    48,639
    
    
    
    (30
    )
    
    
    
    
    
    
    48,609Net income (loss)
    
    $
    120,703
    
    
    $
    (814
    )
    
    $
    246,265
    
    
    $
    (245,451
    )
    
    $
    120,703
    
    
    $
    120,606
    
    
    $
    (120,703
    )
    
    $
    120,606
 CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended March 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    4,617
    
    
    $
    1,487,267
    
    
    $
    
    
    
    $
    1,491,884
    
    
    $
    
    
    
    $
    
    
    
    $
    1,491,884Costs and expenses:Educational services
    
    
    33,320
    
    
    
    2,992
    
    
    
    751,317
    
    
    
    
    
    
    
    787,629
    
    
    
    
    
    
    
    
    
    
    
    787,629General and administrative
    
    
    (48,723
    )
    
    
    2,400
    
    
    
    416,146
    
    
    
    
    
    
    
    369,823
    
    
    
    172
    
    
    
    
    
    
    
    369,995Management fees paid to
affiliates
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    3,750Depreciation and
amortization
    
    
    11,323
    
    
    
    134
    
    
    
    71,550
    
    
    
    
    
    
    
    83,007
    
    
    
    
    
    
    
    
    
    
    
    83,007Total costs and
expenses
    
    
    (330
    )
    
    
    5,526
    
    
    
    1,239,013
    
    
    
    
    
    
    
    1,244,209
    
    
    
    172
    
    
    
    
    
    
    
    1,244,381Income (loss) before
interest and income taxes
    
    
    330
    
    
    
    (909
    )
    
    
    248,254
    
    
    
    
    
    
    
    247,675
    
    
    
    (172
    )
    
    
    
    
    
    
    247,503Interest
(income) expense, net
    
    
    114,117
    
    
    
    
    
    
    
    2,193
    
    
    
    
    
    
    
    116,310
    
    
    
    (296
    )
    
    
    
    
    
    
    116,014Equity in earnings of
subsidiaries
    
    
    (155,858
    )
    
    
    
    
    
    
    
    
    
    
    155,858
    
    
    
    
    
    
    
    (83,049
    )
    
    
    83,049
    
    
    
    Income (loss) before income
taxes
    
    
    42,071
    
    
    
    (909
    )
    
    
    246,061
    
    
    
    (155,858
    )
    
    
    131,365
    
    
    
    83,173
    
    
    
    (83,049
    )
    
    
    131,489Provision for (benefit
from) income taxes
    
    
    (40,978
    )
    
    
    (334
    )
    
    
    89,628
    
    
    
    
    
    
    
    48,316
    
    
    
    47
    
    
    
    
    
    
    
    48,363Net income (loss)
    
    $
    83,049
    
    
    $
    (575
    )
    
    $
    156,433
    
    
    $
    (155,858
    )
    
    $
    83,049
    
    
    $
    83,126
    
    
    $
    (83,049
    )
    
    $
    83,126
  21




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##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 2010 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    EM LLC
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated
    
    
    EDMC
    
    
    ConsolidatedNet cash flows provided by (used in) operations
    
    $
    (55,044
    )
    
    $
    (24,367
    )
    
    $
    419,098
    
    
    $
    339,687
    
    
    $
    470
    
    
    $
    340,157Cash flows from investing activitiesExpenditures for long-lived assets
    
    
    (10,534
    )
    
    
    (1,248
    )
    
    
    (108,043
    )
    
    
    (119,825
    )
    
    
    
    
    
    
    (119,825
    )Other investing activities
    
    
    
    
    
    
    
    
    
    
    (8,229
    )
    
    
    (8,229
    )
    
    
    
    
    
    
    (8,229
    )Net cash flows used in investing activities
    
    
    (10,534
    )
    
    
    (1,248
    )
    
    
    (116,272
    )
    
    
    (128,054
    )
    
    
    
    
    
    
    (128,054
    )Cash flows from financing activitiesNet repayments of debt and other
    
    
    (490,243
    )
    
    
    
    
    
    
    (598
    )
    
    
    (490,841
    )
    
    
    
    
    
    
    (490,841
    )Net proceeds from issuance of common stock, including
stock option exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,998
    
    
    
    387,998Intercompany transactions
    
    
    942,703
    
    
    
    29,819
    
    
    
    (588,707
    )
    
    
    383,815
    
    
    
    (383,815
    )
    
    
    Net cash flows provided by (used in) financing activities
    
    
    452,460
    
    
    
    29,819
    
    
    
    (589,305
    )
    
    
    (107,026
    )
    
    
    4,183
    
    
    
    (102,843
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    59
    
    
    
    
    
    
    
    59Increase (decrease) in cash and cash equivalents
    
    
    386,882
    
    
    
    4,204
    
    
    
    (286,420
    )
    
    
    104,666
    
    
    
    4,653
    
    
    
    109,319Beginning cash and cash equivalents
    
    
    15,789
    
    
    
    481
    
    
    
    305,287
    
    
    
    321,557
    
    
    
    41,761
    
    
    
    363,318Ending cash and cash equivalents
    
    $
    402,671
    
    
    $
    4,685
    
    
    $
    18,867
    
    
    $
    426,223
    
    
    $
    46,414
    
    
    $
    472,637
  22




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended March 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    EM LLC
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated
    
    
    EDMC
    
    
    ConsolidatedNet cash flows provided by (used in) operations
    
    $
    (30,758
    )
    
    $
    1,674
    
    
    $
    343,659
    
    
    $
    314,575
    
    
    $
    342
    
    
    $
    314,917Cash flows from investing activitiesExpenditures for long-lived assets
    
    
    (8,914
    )
    
    
    (1,128
    )
    
    
    (87,943
    )
    
    
    (97,985
    )
    
    
    
    
    
    
    (97,985
    )Other investing activities
    
    
    
    
    
    
    
    
    
    
    (19,191
    )
    
    
    (19,191
    )
    
    
    
    
    
    
    (19,191
    )Net cash flows used in investing activities
    
    
    (8,914
    )
    
    
    (1,128
    )
    
    
    (107,134
    )
    
    
    (117,176
    )
    
    
    
    
    
    
    (117,176
    )Cash flows from financing activitiesNet proceeds from (payments of) debt and other
    
    
    50,208
    
    
    
    (1
    )
    
    
    (809
    )
    
    
    49,398
    
    
    
    
    
    
    
    49,398Intercompany transactions
    
    
    463,132
    
    
    
    (66
    )
    
    
    (463,066
    )
    
    
    
    
    
    
    
    
    
    
    Net cash flows provided by (used in) financing activities
    
    
    513,340
    
    
    
    (67
    )
    
    
    (463,875
    )
    
    
    49,398
    
    
    
    
    
    
    
    49,398Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    1,163
    
    
    
    1,163
    
    
    
    
    
    
    
    1,163Increase (decrease) in cash and cash equivalents
    
    
    473,668
    
    
    
    479
    
    
    
    (226,187
    )
    
    
    247,960
    
    
    
    342
    
    
    
    248,302Beginning cash and cash equivalents
    
    
    2,311
    
    
    
    135
    
    
    
    233,581
    
    
    
    236,027
    
    
    
    41,381
    
    
    
    277,408Ending cash and cash equivalents
    
    $
    475,979
    
    
    $
    614
    
    
    $
    7,394
    
    
    $
    483,987
    
    
    $
    41,723
    
    
    $
    525,710
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EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 15. SUBSEQUENT EVENTS
   24




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 Results of Operations
  Amounts expressed as a percentage of net revenues
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 For the Three Months
    
    
    For the Nine MonthsEnded March 31,
    
    
    Ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Educational services
    
    
    48.4
    %
    
    
    50.1
    %
    
    
    50.3
    %
    
    
    52.8
    %General and administrative
    
    
    26.1
    %
    
    
    24.1
    %
    
    
    26.5
    %
    
    
    24.7
    %Management fees paid to affiliates
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    1.7
    %
    
    
    0.3
    %Depreciation and amortization
    
    
    4.6
    %
    
    
    5.4
    %
    
    
    4.8
    %
    
    
    5.6
    %Total costs and expenses
    
    
    79.1
    %
    
    
    79.8
    %
    
    
    83.3
    %
    
    
    83.4
    %Income before interest, loss on
early retirement of debt and
income taxes
    
    
    20.9
    %
    
    
    20.2
    %
    
    
    16.7
    %
    
    
    16.6
    %Interest expense, net
    
    
    4.2
    %
    
    
    7.0
    %
    
    
    5.1
    %
    
    
    7.8
    %Loss on early retirement of debt
    
    
    0.4
    %
    
    
    0.0
    %
    
    
    2.5
    %
    
    
    0.0
    %Income before income taxes
    
    
    16.3
    %
    
    
    13.2
    %
    
    
    9.1
    %
    
    
    8.8
    %Provision for income taxes
    
    
    3.7
    %
    
    
    4.9
    %
    
    
    2.6
    %
    
    
    3.2
    %Net income
    
    
    12.6
    %
    
    
    8.3
    %
    
    
    6.5
    %
    
    
    5.6
    %
 Three months ended March 31, 2010 compared to the three months ended March 31, 2009
 All basis point changes are presented as a percentage of net revenues in each period of
comparison.
 Net revenues
   25




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Educational services expense
   Federal Family Education Loan Program and Private Student Loans
  General and administrative expense
    26




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Management fees paid to affiliates
  Depreciation and amortization expense
  Interest expense, net
  Loss on early retirement of debt
  Provision for income taxes
    27




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Nine months ended March 31, 2010 compared to the nine months ended March 31, 2009
 All basis point changes are presented as a percentage of net revenues in each period of
comparison.
 Net revenues
  Educational services expense
  Federal Family Education Loan Program and Private Student Loans
  General and administrative expense
    28




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Management fees paid to affiliates
  Depreciation and amortization expense
  Interest expense, net
  Loss on early retirement of debt
  Provision for income taxes
   Liquidity and Funds of Capital Resources
   29




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Operating cash flows
      Investing cash flows
    30




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Financing cash flows
       Federal Family Education Loan Program and Private Student Loans
   31




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Contingencies
  New Accounting Standards Not Yet Adopted
  Non-GAAP Financial Measures
   For the Three Months
    
    
    For the Nine MonthsEnded March 31,
    
    

Ended March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    84.6
    
    
    $
    44.1
    
    
    $
    120.6
    
    
    $
    83.1Interest expense, net
    
    
    27.9
    
    
    
    37.4
    
    
    
    94.7
    
    
    
    116.0Loss on early retirement of debt (1)
    
    
    2.4
    
    
    
    0.0
    
    
    
    47.2
    
    
    
    0.0Provision for income taxes
    
    
    24.7
    
    
    
    26.1
    
    
    
    48.6
    
    
    
    48.4Depreciation and amortization
    
    
    30.7
    
    
    
    28.8
    
    
    
    88.9
    
    
    
    83.0EBITDA
    
    $
    170.3
    
    
    $
    136.4
    
    
    $
    400.0
    
    
    $
    330.5
 (1)
    
    In connection with the initial public offering in October 2009, we retired
$316.0 million of the Senior Subordinated Notes in a tender offer. We also
purchased Senior Subordinated Notes with a face value of $21.4 million in the
third quarter of fiscal 2010 through another tender offer. Covenant Compliance
   33




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34




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For the twelvemonths endedMarch 31,2010Net income
    
    $
    141.9Interest expense, net
    
    
    132.0Loss on early retirement of debt (1)
    
    
    47.2Provision for income taxes
    
    
    61.5Depreciation and amortization
    
    
    118.2EBITDA
    
    
    500.8Reversal of impact of unfavorable leases (2)
    
    
    (0.9
    )Management fees paid to affiliates (3)
    
    
    33.3Severance and relocation
    
    
    7.0Non-cash compensation
    
    
    19.4Capital taxes
    
    
    5.0Other
    
    
    6.9Adjusted EBITDA  Covenant Compliance
    
    $
    571.5
 (1)
    
    In connection with the initial public offering in October 2009,
we retired $316.0 million of the Senior Subordinated Notes in a
tender offer. We also purchased Senior Surbordinated Notes
with a face value of $21.4 million in the third quarter of
fiscal 2010 through another tender offer.(2)
    
    Represents non-cash reduction to rent expense due to the
amortization on $7.3 million of unfavorable lease liabilities
resulting from fair value adjustments required as part of the
Transaction.(3)
    
    Represents fees incurred under a management advisory agreement
with the Sponsors. Upon the completion of our initial public
offering, we terminated the agreement with the Sponsors for a
fee of $29.6 million.  Covenant
    
    
    ActualSenior secured credit facility
    
    Requirements
    
    
    RatiosAdjusted EBITDA to Consolidated Interest Expense ratio
    
    Minimum of 2.00x
    
    
    4.31xConsolidated Total Debt to Adjusted EBITDA ratio
    
    Maximum of 5.75x
    
    
    1.95x
  35




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Certain Risks and Uncertainties
   36




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       37




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ITEM 4. CONTROLS AND PROCEDURES
    38




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PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  The U.S. Department of Education is in the process of preparing proposed regulatory changes that,
if enacted, could materially and adversely impact our business.
    39




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If our institutions do not comply with the 90/10 Rule, they will lose eligibility to participate in
federal student financial aid programs.
   40




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS INDEX
 Number
    
    Document31.1
    
    
    Certification of Todd S. Nelson required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Edward H. West required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Todd S. Nelson required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Edward H. West required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002.
  41




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SIGNATURE
  /s/ Edward H. WestEdward H. WestPresident and Chief Financial Officer
   42